Have you reviewed your current employment contracts or are you taking on new staff? Congratulations on the growth in your business and your attention to the relevant law.

Understanding whether a worker is a contractor or an employee is vital for many reasons. Why? Your tax, superannuation and other government obligations vary depending on whether your worker is an employee or contractor.

It’s against the law to categorize an employee as a contractor due to varying taxation and superannuation implications.

How can I minimize risk?

Businesses that fail to acknowledge this very real distinction are at risk of being penalised. These penalties include:

  • A monetary penalty for failing to meet Pay As You Go (“PAYG”) withholding requirements;
  • A super guarantee charge for failing to make the correct superannuation contributions, which consists of:

o   The shortfall (up-to-date payments)

o   The interest on the shortfall

o   An administrative fee

For instance, you may take on a contractor, at $100 an hour, for 25 hours per week, for 10 months. If they turn out to be an employee by law, then you may be required to pay the minimum superannuation guarantee of 9.5%, in addition to the contracting fee that you have paid. This would be over $9,500, plus interest, penalties and fees.

What is the Australian Tax Office Test for determining this?

When taking a new employee, you need to confirm whether he or she is an employee or contractor before entering into the agreement. An employee typically works as part of a larger organisation. A contractor is running their own business under their own Australian Business Number. To determine whether your worker is an employee or contractor, use the ATO online tool, available here: https://www.ato.gov.au/Calculators-and-tools/Employee-or-contractor/

Should I keep records?

You need to keep records to support your decision on whether your worker is an employee or contractor, and the factors you relied on.

What are the main points of difference between an employee and a contractor?

  • Ability to sub-contract or delegate

Employees cannot sub-contract or delegate their work and cannot pay someone else to do their work for them. Contractors, however, are allowed to delegate or sub-contract and pay someone else to do the work for them.

  • Basis of payment

Employees are paid in salaries, hourly rates and/or on commission-based structures. Contractors are paid on varying bases, including a one-off payment due at the completion of the job.

  • Equipment

In an employer-employee relationship, the employer usually pays for the business equipment. Contractors usually provide and maintain their own equipment and tools.

  • Risk

Employees are generally not at commercial risk while employed, as the employer has legal responsibility for the actions of its employees while at work. Contractors, however, are responsible for their own conduct and the commercial risks of the work.

  • Control over work

Employers are expected to give employees direction in terms of the type of work that is required and how the work is performed. Contractors are able to perform the work as they choose, provided they adhere to the terms and conditions of the agreement.

  • Independence

An employee and employer are working for the same business and the same goals. Contractors are running their own business, independent of the hirer. They can elect whether or not they will do extra work (depending on the terms of the contract) and are allowed to enter contracts with a third parties.

What is the difference between an employment contract and a contractor’s contract?

A contractor’s contract is an agreement between a company (known as the “principal”) and a service entity (known as the “contractor”).

An employment contract is an agreement between employer and employee and establishes the terms and conditions of the employment. It can be verbal or written.

The agreements address the different legal requirements of the employee or contractor relationship, including:

  • Term and payment;
  • Insurance, Taxation, Superannuation and Reporting;
  • Subcontracting, Exclusivity and Restraint and Termination Provisions.

What are different tax requirements?

Employers are required by the ATO to make compulsory superannuation guarantee contributions to the superannuation fund chosen by the employee, or, alternatively the employer’s fund. On top of this, employers withhold PAYG tax from any income paid out to employees as required by law.

Contractors have very different taxation requirements. In contrast to employers, they themselves are responsible for meeting their taxation and superannuation obligations. Employers are generally not required to make tax deductions from any amount that the contractors have been paid.


The ATO test used to determine whether a worker is an employee or a contractor is quite stringent. Even if someone seems like they’re working in a contractor’s capacity, the test may determine otherwise. Instead of guessing, take the test yourself and avoid paying superannuation penalties and fines. While you’re checking, have an employment solicitor or a contract lawyer look over your employment contracts to ensure they reflect the capacity of the worker.

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